Topic: Could take 5-8 years to shrink Fed portfolio: Yellen - page 3. (Read 10156 times)

That might be true today but thats wrong in the grand scheme of things.   Saving is not waste, pure cash kept in a biscuit jar sure I guess its not wise but savings deposited with a insurance or savings company is a good thing that supports a community.  This is no longer cash then, it is investment
A country needs capital for investment, it cant always be about debt because where does the money come from to enable that debt.   At some point savings or unspent production must be directed towards investment, it cannot always be about spending every penny you've got.   But hey dont worry, the asians are obsessed with saving, its their problem

I agree about owning your own home and so on but that does require savings also, all debt is not a good idea or basis for an economy to operate on.  Leverage adds risk and timing failure possible.   In the end we see it ends up with government being forced to save consumers from themselves and because this is a democracy this has the country bending over backwards to serve people who failed to save, did not engage foresight in their actions or caution as to the consequences.

 In the end we are all poorer for not saving, for not being to access savings as a nation.  Externally this gap is being covered by foreigners but this brings danger of imbalance and compromised sovereign integrity also

This would not punish people who save cash, as generally people can earn more with their bank account from interest then inflation would reduce the buying power.

Its the individuals choice to save cash.  Most people only save cash short term to buy something.  Its not wise to save cash if you plan to hold for long term

Why punish workers who save cash?

This is exactly why that mild inflation is not necessarily a bad thing. Another point to make for savers/investors is that most asset prices increase faster then the rate of inflation (including dividends and similar payments).

Majority make higher wages as they compete in the workplace for promotions.   Then they invest in real estate or retirement accounts.   Most people dont care about mild deflation,  they care about employment.   If you are talking about too much inflation or stagflation then thats a different discussion

I don't buy the arguments here for deflation.   Too much assumption about a static economy when in fact economies are dynamic

Wages tend to rise faster then inflation, this is one reason why the Social Security trust fund is in the shape that it is in because it gives recipients raises in terms of wage growth instead of purchasing power (inflation). So someone who received social security 10 years ago will have started with a monthly award that had less purchasing power then their monthly award today.

Very good post.  I think it'll be difficult for folks here to understand MMT without understand double entry book keeping.

But I agree with you.  Wealth comes from the "real economy" rather than monetary policies.  But even with QE & stimulus on a grand scale experiment like Abenomics have not shown to produce results.  Time will tell indeed

I think it's fair to assume that treasuries are quasi-money. They can be used as collateral in most market operations. And the money thing has been eroded to a degree by financialization of the economy.

What about wealth. I tend to argue that Treasury is the govt entity that creates wealth, while the Fed doesn't. That's because when the govt does deficit spending, it adds net financial assets to the private sector, while the Fed only changes the assets composition. That's all about accounting basics and sectoral balances. On this topic I'd recommend reading Modern Monetary Theory ideas.

Now about M2. I think this money measure doesn't work in this QE reality. Just because a large part of money counted just sits idle and doesn't participate in economic activity. I also think that money velocity didn't fall as much as calculations show, just because it consider this 'idle money' created by QE.

It all looks like a big Théâtre de l'Absurde and does carry very little economical sense. But time will tell.

All boats rise in a rising tide is how Ive read that in articles IVe read.    I dont believe inflation is that perfect an effect and it benefits the rich far more then the poor.   Owning a Ferrari F40 in the last decade has been a profitable endeavour but that is partly because classic car collecting is such an exclusive pursuit to begin with, its not really helped your average Chevy owner; 'lifts everything' is unfortunately not linear, its uneven,  so tip over is more like its effects for many people.     Microsoft, Intel, Apple and a few others can issue their debt at a 1% cost, gigantic benefit to them and their shareholders so thats about as close to mainstream it gets imo; I dont believe that is filtering through to the public more like the 1% argument comes in here
 Your average worker really doesnt have assets in many cases but he will notice the rising cost of everything.     In that analogy I would say it creates turbulence, some boats break from their moorings unable to resist the increasing currents becoming rapids and some even sink :p

http://en.wikipedia.org/wiki/A_rising_tide_lifts_all_boats

You've definitely identified what Fed policy reflects, they really think they will make us better off but they are closer to fraud then benevolence

That's only if you are an outside observer.  If you are inside the economy inflation lifts everything.  If you sell stuff you can inflate your prices so your income stays the same

1.04 to the power of 40        or 4% interest over 40 years is alot of growth = 480% I think

I assume if I take it as a decline in value compounded, then 4% less each year or 0.96^40 results in 20% left after 40 years.

Every time they give your gains, they exclude inflation usually.  If you ever wondered why you arent getting any richer, thats probably it.  Hence constant wage increases are demanded by unions which can lead to labour disputes and strikes, production disruption because a company doesnt necessarily have the money just because the workers need it and are poorer.

That is right. People who advocate inflation don't seem to understand compound rate.

No, that is not stable. It means that every dollar you save in your first productive year, is reduced to 0.18 after 40 years, when you need it.

Currencey is something that holds value....at least for the immediate future.

No one would pay you interest for holding money. With good money, why would you want to? The money you hold is the compressed value of the work you have done, but not yet traded for other goods. With good money there is no risk, it is the definition of good money.

Thanks. I'm going to try regurgitating my understanding with some new assumptions and hope I'm getting close to truth.

-So banks don't get to sell T-bonds at face value, just market price or sometimes even below for cash. The Fed allows this both to prevent problems with reserve requirements (and everything going along with banks not having enough) and I'd guess to also prevent large dumps on the T-bond market, which in turn makes T-bonds relatively stable, thus more attractive.

Many large banks are members of the Fed (paying both dues and fees), but the profit goes to the Treasury. The Treasury does create money, but it doesn't create wealth -- banks don't get free wealth from the Fed, while benefits are all fairly well-balanced to keep money-creation powers not fully divested to either the market or the government, permitting a semi-market-based approach to money creation. Since Fed profits go to the Treasury (less overhead, losses, etc), the Treasury is effectively allowed to issue T-bonds and not pay interest, but only for T-bonds sold to the Fed at or below market rates. Discounting debt devaluation (in real terms) from inflation, this scheme of doing things prevents the government from just printing any financial troubles away (if they tried, the uncertainty from breaking this unspoken contract risks complete USD and T-bond meltdown, which could bring a ruinous banking crisis). In times of banking turbulence, like now and in recent history, lots of money is created this way, but banks use this money generally to meet reserve requirements (either those set by gov't or those self-imposed) after taking losses or otherwise over-extending themselves, so it doesn't just go right back into the economy, at least not until the banks recover and a healthy (or dangerously over-permissive, maybe "predatory") state of lending resumes. Everything works in a very complex, somewhat balanced way that usually (except in cases of extreme political pressure?) prevents quick and extreme reactions to short-term or mid-term problems. This permits long-term health for the US dollar.

I'm still not sure why M2 increase doesn't eventually mean we'll feel inflation from it when lending fully un-thaws, especially if the effects are suppressed/delayed by low money velocity. It doesn't factor in debts written off by banks for things like mortgages or LoCs, so maybe that acts as a deflationary force, reducing money velocity (lower home prices, less money circulating, especially lent money) and reducing the money supply (houses aren't counted in M2, but banks do have to write off the debts occasionally and usually take large losses in trying to sell the mortgaged property - consumers and businesses taking LoC probably aren't buying CDs, T-bonds, or making demand deposits). -But the housing market's had a huge uptick over the last couple years, unemployment's stabilized, and real wages are on the way up, so if M2 had any impact at all, why hasn't it effectively turned the value of our dollars to ash? Conservative banks?

(side-question: is money for repos also created or even significant compared to Fed T-bond purchases?)

As long as your currency is a stable store of value then it can be considered as money. 4% inflation, would in general be considered stable, especially considering that interest rates on deposits historically tends to be right around the rate of inflation

Yes, banks hold some quantity of treasuries at almost any time (and recent Basel rules oblige them to do so). It's important to note that treasuries carry price risk, i.e. they can decline in price and bank would suffer, and the longer the maturity, the higher the price risk. The reserve position at Fed doesn't have this risk, it's just cash. That's why banks may prefer reserves in certain situations.

The Fed doesn't need assets to create money, it acquires (buys) assets when it creates new money. It's needed to be noted that when the Fed creates money it doesn't add any financial assets (wealth) to the economy, only changes the composition. When the Fed posts operating profit, most of it goes to Treasury. When the Fed posts loss, it's usually also offset by capital injection by Treasury.

Treasury securities are the perfect collateral for the markets. When the Fed buys bonds under QE, it does so for market prices. But it's also possible (and was possible long before the crisis) to sell them to the Fed at a small discount and get reserves in return (so called discount window). This combined with Fed's repo operations makes reserves virtually unlimited and reserve requirements obsolete.

You also have to distinguish between reserves and capital. Reserves can only be used in transactions between banks and Treasury, be converted to cash and be exchanged for treasuries. These operations can't help if a bank has capital shortfall. Capital can only be replenished with external sources (like bailout by Treasury).

Another crisis event will likely cause deflation because of lending freeze, unemployment rise and incomes fall. These consequences together will cause demand slump and in turn price deflation. The alternative option is stagflation, but it's hard to predict.

It is more like a price adjustment than deflation event. When people buy over price property and if the market can no longer handle additional supply, price will have to adjust to market demand.